07.25.12

Its been a little hard to make sense of some of the data emerging from Inmarsat recently. For example, a recent factsheet from OnAir indicates that the first Global Xpress launch will be in October 2013, followed by subsequent launches in April and November 2014. Perhaps OnAir is confusing the launch date and the availability of the satellite for commercial service, but if these are indeed the launch dates, then they are later than the timeline that Inmarsat’s partners were given back in January this year of a first launch in June 2013 followed by subsequent launches in Q1 and Q3 of 2014 (and they don’t correspond to the “availability” dates given then either), even though Inmarsat stated on the Q1 results call in May that GX was “on schedule and on budget”.

We’ve also seen Inmarsat defending its price rises in a briefing paper to the International Chamber of Shipping by stating that their Standard Plan for FleetBB only costs $130 for the subscription charge, or $13/Mbyte for the bundled data. However, Stratos’s website indicates that the subscription fee for the Standard Plan was increasing to $208 per month from May 1, and Inmarsat has indicated separately that the wholesale price alone was being increased by $3 per day or $90 per month (to what I estimate is something very close to $130). So is Inmarsat assuming that distributors will now sell at zero margin, or is it simply quoting a wholesale price when a retail price would be more relevant?

Hopefully we’ll hear a explanation of these apparent inconsistencies on Inmarsat’s upcoming results call, or at least at Inmarsat’s investor day in October. But (mixing my literary references) as Inmarsat continues to suffer the slings and arrows of outrageous fortune, amid predictions of its imminent “downfall”, it might be worth taking a lesson from William Tell’s son, and standing still!

07.12.12

LightSquared’s recent filing of the Employment Contract with Sanjiv Ahuja, its former CEO, makes for interesting reading, especially for those impacted by the LightSquared bankruptcy. According to the terms of the agreement, Mr Ahuja was entitled to a base salary of $2M per year plus a target bonus of 150% of his base salary. In addition he was to receive restricted stock with an initial fair market valuation of $135M. All of his domestic travel was to take place by private jet (which must have been useful because NetJets was paid $227K in the 90 days prior to LightSquared’s bankruptcy filing, and NetJets was billing around $100K per month prior to Mr Ahuja leaving in February 2012), including short haul international travel, and “in his reasonable good faith judgment” Mr Ahuja could also “require the use of private planes for long-haul international travel, as appropriate”. Remarkably, however, Mr Ahuja was only expected to devote 50% of his working time to the company.

Now that a proposed settlement has been reached over termination of his employment, Mr Ahuja will be able to retain the 8.83M shares of stock he would have been granted (apparently he did not take the restricted stock he was entitled to at the time, because of the large tax liability that would have been incurred: perhaps he thought that the price would go down rather than up!). Indeed, though the 8.83M shares apparently had a “fair market valuation” of $135M (presumably reflecting the restrictions applicable to the grant), LightSquared Inc. had sold 3.39M shares of common stock to SK Telecomfor $60M, giving an market valuation of $17.71 per share, for a total value at that time of $156.4M. Indeed, if Harbinger’s supposed prior contribution of $2.9B of assets to LightSquared (in exchange for 91.88M shares) had been taken at face value, then Mr Ahuja’s shares could theoretically have been worth as much as $31.50 each, for a total of $278M. And if LightSquared’s spectrum had been worth $12B, after the waiver grant, as LightSquared’s consultant told the FCC, then (after deducting LightSquared’s debt) Mr. Ahuja’s stock would have been worth $90-$100+ per share, or at least $800M!

Of course, one has to wonder what on earth Mr Falcone thought he was buying for this sort of money, because it certainly didn’t seem to be a realistic judgment about LightSquared’s prospects of resolving its GPS issues. However, perhaps what was really important was that LightSquared’s debt investors believed Mr Ahuja’s assurances that there wasn’t any need to worry about GPS, when he was persuading them to invest an additional $586M in the company in February 2011. I’m sure Mr Ahuja therefore appreciates the indemnification he is receiving under the proposed settlement agreement “to the fullest extent permissible under LightSquared’s organizational documents and the Employment Agreement…from and against any and all claims and demands related to actions or omissions of the Executive during the time the Executive was as a director, officer or employee of LightSquared.”

Its therefore pretty instructive to look at the CTIA’s own figures, which curiously enough simply trumpet the cumulative capex invested by US wireless operators since the 1980s. When you think about it, that’s a bizarre statistic, since cumulative capex will always go up each year, however much wireless operators invest in their networks. Of course, if you actually look at the annual capex you see a very different picture, and indeed in absolute terms network investment has fallen quite sharply since 2004, and only rebounded partially in 2010 and 2011, despite much trumpeted LTE rollouts by Verizon, AT&T and others.

As a percentage of revenues, capex has fallen even further, and has roughly halved in the last decade. At this point, if I was using the tortured logic (and ludicrously hyped sound bites) of spectrum crisis adherents, I should probably conclude that on current trends we will run out of capex by the end of the decade, as capex falls to zero percent of revenues. On the other hand, if I was arguing the carriers’ point of view, I could conclude that because the GDP contribution of the wireless industry increased from $92B in 2004 to $146.2B per year by mid 2011, while capex fell from 27% to 15% of revenues, each 1% decline in capex as a percentage of revenues should be expected to increase GDP by $4.3B. As a result, if wireless carriers stopped all capex completely, it would increase GDP by $65B!

More rationally, while reductions in operator capex in recent years may have been good for their investors in the short term (and indeed carriers would perhaps view it as necessary because their revenue growth has slowed), these figures clearly demonstrate that there is considerable scope to address growth in data usage (assuming the traffic is valuable enough that customers will pay more for it) simply by modestly increasing capex to a level that would fall well within historical norms. Indeed, even though annual capex in 2011 only increased (in absolute dollars) by 1.7% over 2010, operators added over 30,000 cell sites, an all time record, which increased the total number of cellsites in the US by 12%. Given that the FCC’s own (discredited) model suggested that the purported spectrum “deficit” would vanish with this rate of cellsite growth, it seems we are already well on the way to mitigating any potential spectrum crisis.